XXIII. INSIDER DEALING (SECTIONS 270 AND 291 OF THE SFO)
Insider dealing takes place when:
- a person who is (1) connected with a listed issuer and having information which he knows is inside information; or (2) contemplating (or has contemplated) making a take-over offer for a listed issuer and who knows that the information that the offer is contemplated (or is no longer contemplated) is inside information in relation to the listed issuer:
- deals, or counsels or procures another to deal, in the company’s listed securities or their derivatives or in those of a related corporation (otherwise than for the purpose of the takeover in the case of paragraph (2) above); or
- discloses the information knowing or having reasonable cause to believe that the recipient will use the information to deal, or to counsel or procure another person to deal, in the company’s listed securities or their derivatives or in those of a related corporation;
- a person who has received inside information from a connected person or a person who is contemplating or has contemplated making a takeover offer for a listed issuer either deals, or counsels or procures another person to deal, in the company’s listed securities or their derivatives or those of a related corporation;
- a person who has information which he knows is inside information in relation to a listed issuer in any of the circumstances referred in paragraphs (i) and (ii) above:
- counsels or procures another person to deal, knowing or having reasonable cause to believe that the person will deal, in the company’s listed securities or their derivatives or in those of a related corporation outside Hong Kong on an overseas stock market; or
- discloses the information knowing or having reasonable cause to believe that the recipient will use the information to deal, or to counsel or procure another person to deal, in the company’s listed securities or their derivatives or in those of a related corporation outside Hong Kong on an overseas stock market.
2. Key definitions
The term “securities” is defined widely and includes shares, stocks, debentures, loan stocks, bonds and notes as well as any rights, options or interests in respect of any of the foregoing.
“Persons connected with a corporation” or “connected persons” include the directors (including non-executive directors and shadow directors), employees and substantial shareholders (meaning those holding 5% or more of the issued voting share capital) of the listed issuer and its related corporations. The term also includes persons who have a professional or business relationship with the listed issuer or its related corporation which give them access to inside information.
“Related corporations” of a listed issuer include its subsidiaries and holding companies and other subsidiaries of any holding company of the listed issuer. In addition, where two or more companies are controlled by the same individual, each of those companies and their subsidiaries are regarded as “related corporations” of each other.
“Control” for these purposes means that the individual controls either the composition of the company’s board of directors or more than half of the voting power at general meetings of the company, or holds more than half of the company’s issued shares.
“Inside information” in relation to a company means specific information about the company, a shareholder or officer of the company, the listed securities of the company or their derivatives, which is not generally known to the persons who are accustomed or likely to deal in the listed securities of the company but which would, if it were generally known to them, be likely to materially affect the price of the listed securities.
The directors of a listed issuer will be “insiders” for the purposes of these provisions. In practical terms, this means that a director should immediately refrain from dealing or procuring another to deal in the listed securities of his own company once he is aware of, or privy to any negotiations, agreements or information which are or may be price-sensitive until a formal announcement of such information has been made.
XXIV. MARKET MISCONDUCT
The SFO sets out 6 types of market misconduct which are prohibited in relation to shares listed on the Exchange. Market misconduct includes:
- insider dealing;
- false trading;
- price rigging;
- disclosure of information about prohibited transactions;
- disclosure of false or misleading information inducing transactions; and
- stock market manipulation.
1. False Trading (Sections 274 and 295 of the SFO)
False trading takes place when a person:
- intentionally or recklessly engages in conduct which creates a false or misleading appearance:
- of active trading in securities or futures contracts traded on an exchange or through an authorised automated trading service (“ATS”) in Hong Kong; or
- with respect to the market for, or the price of, such securities or futures contracts;
- engages in similar conduct similar to (i) above in Hong Kong which has a similar effect on securities or futures contracts traded on an overseas market;
- is involved in one or more transactions with the intention that, or being reckless as to whether, they create or maintain an artificial price for securities or futures contracts traded on an exchange or through an ATS in Hong Kong;
- engages in conduct similar to (iii) above in Hong Kong which has a similar effect on securities or futures contracts traded on an overseas market;
A person who engages in an on-market “wash sale” or “matched order” is presumed to have committed false trading. A “wash sale” is a trade in which a person buys or sells securities without there being a change in beneficial ownership. A “matched order” is where a person offers to buy or sell securities at a price that is substantially the same as that at which he or an associate has made or proposes to make, an offer to sell or buy substantially the same number of such securities.
2. Price rigging (sections 275 and 296 of the SFO)
Price rigging occurs when a person engages in:
- a wash sale of securities which maintains, increases, reduces, stabilises or causes fluctuations in, the price of securities traded on an exchange or through an ATS in Hong Kong; or
- any fictitious or artificial transaction or device with the intention that, or being reckless as to whether, it maintains, increases, reduces, stabilizes or causes fluctuations in, the price of securities or futures contracts traded on an exchange or through an ATS in Hong Kong.
The same conduct by a person in Hong Kong which affects securities or futures contracts traded on an overseas market will also constitute price rigging if such conduct is unlawful in the country in which the relevant market is situated.
3. Stock Market Manipulation (sections 278 and 299 of the SFO)
These provisions relate only to transactions in securities. Stock market manipulation occurs when a person, in Hong Kong or elsewhere, engages directly or indirectly in two or more transactions in the securities of a company that by themselves or in conjunction with any other transaction increase, reduce, maintain or stabilise the price of any securities traded on an exchange or through an ATS in Hong Kong, or are likely to do so, with the intention of inducing another person to buy or subscribe for, or to refrain from selling, securities issued by that corporation or a related corporation.
The same conduct by a person in Hong Kong which affects securities traded on an overseas market will also amount to stock market manipulation if the same conduct is unlawful in the relevant country.
4. Disclosure of information about prohibited transactions (sections 276 and 297 of the SFO)
Disclosure of information about prohibited transactions occurs when a person, in Hong Kong or elsewhere, discloses or disseminates, or authorises or is concerned in the disclosure or dissemination of, information about the effect of a prohibited transaction (being a transaction which contravenes the provisions of Part XIII or XIV of the SFO) on the price of securities or the price for dealings in future contracts traded on a Hong Kong market, if the person or an associate of his:
- participates in the prohibited transaction;
- or benefits or expects to benefit, directly or indirectly, from the disclosure, circulation or dissemination of the information.
5. Disclosure of false or misleading information inducing transactions (sections 277 and 298 of the SFO)
This form of market misconduct concerns the disclosure of false or misleading information about securities or futures contracts that is likely to induce investment decisions or have a material price effect. A person will have engaged in market misconduct if he discloses or is involved in the disclosure of:
- information likely to induce others to enter into transactions or to affect the price of securities or futures contracts, that is false or misleading in a material fact or through the omission of a material fact; and
- he knows or is reckless or (for civil market misconduct only) negligent as to whether, the information is false or misleading in a material fact or through the omission of a material fact.
Negligence will not suffice to establish criminal liability.
6. Dual Civil and Criminal Regimes
The six forms of market misconduct may either be prosecuted as a criminal offence under Part XIV SFO or made the subject of civil proceedings before the Market Misconduct Tribunal (“MMT”).
7. Criminal Penalties
The maximum criminal sanction is 10 years’ imprisonment and/or a fine of up to $10 million. The court may also impose disqualification, cold shoulder and disciplinary referral orders. Failure to comply with a disqualification or cold shoulder order is an offence liable to a maximum fine of $1 million and up to 2 years’ imprisonment.
8. No double jeopardy
A person will not be subject to the ‘double jeopardy’ of both civil proceedings under Part XIII and criminal proceedings under Part XIV for the same conduct. The SFO provides that a person who has been subject to criminal proceedings under Part XIV may not be subject to MMT proceedings if those proceedings are still pending or if no further criminal prosecution could be brought against that person again under Part XIV in respect of the same conduct and vice versa (Sections 283 and 307 SFO).
9. Proceedings of the MMT
The MMT may identify a person as having engaged in market misconduct if:
- he has perpetrated any market misconduct;
- the market misconduct was perpetrated by a corporation of which he is an officer with his consent or connivance; or
- another person engaged in market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.
10. Orders of the MMT
At the end of any proceedings, the MMT may impose the following sanctions:
- a disqualification order – that a person shall not, without the leave of the Court of First Instance, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed corporation or any other specified corporation or in any way, whether directly or indirectly, be concerned or take part in the management of a listed corporation or other specified corporation for up to 5 years;
- a cold shoulder order – that a person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any of them or a collective investment scheme for up to 5 years;
- a cease and desist order – that the person must not again engage in any specified form of market misconduct;
- a disgorgement order – that the person pay to the Government an amount up to the amount of any profit gained or loss avoided as a result of the market misconduct;
- Government costs order – that the person pay to the Government its costs and expenses in relation to the proceedings and any investigation;
- SFC costs order – that the person pay the SFC’s costs and expenses in relation to any investigation; and
- disciplinary referral order – that any body which may take disciplinary action against the person as one of its members be recommended to take such action against him.
11. Civil Liability – Private right of action
The SFO creates a private right of civil action in favour of anyone who has suffered financial loss as a result of market misconduct or any offence under Part XIV to seek damages from the person who committed the market misconduct or Part XIV offence. The perpetrator is liable to pay damages, unless it is fair, just and reasonable that he should not (Sections 281 and 305 SFO).
A person will be taken to have committed market misconduct if:
- he has perpetrated any market misconduct;
- the market misconduct was perpetrated by a corporation of which he is an officer with his consent or connivance; or
- any other person committed market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.
12. Liability of Officers
Section 279 of the SFO imposes a duty on all officers of a corporation to take reasonable measures to ensure that proper safeguards exist to prevent the corporation from acting in a way which would result in the corporation perpetrating any market misconduct. The duty applies to all forms of market misconduct and not just insider dealing.
The definition of an “officer of a corporation” includes a director (including a shadow director and any person occupying the position of a director), manager or secretary of, or any other person involved in the management of, the corporation. The last category (ie. any other person involved in management) could, in principle, catch supervisors and anyone else with management responsibilities.
Under Section 258, where a corporation has been identified as having been engaged in market misconduct and the market misconduct is directly or indirectly attributable to a breach by any person as an officer of the corporation of the duty imposed on him by Section 279, the MMT may make one or more of the orders detailed above in respect of that person even if that person has not been identified as having engaged in market misconduct himself. However, a breach of the Section 279 duty will not expose a person to civil suits by third parties unless he has been identified as having engaged in market misconduct.
13. Civil Liability of Officers
As described above, the SFO clearly provides that anyone who suffers financial loss as a result of market misconduct or a Part XIV offence has a right of civil action to seek compensation. As noted above, an officer of a corporation which perpetrated market misconduct is taken to have committed market misconduct himself, if the corporation perpetrated the misconduct with his consent or connivance.
14. Criminal Liability of Officers
Under Section 390 of the SFO, where it is proved that an offence committed under Part XIV was aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to the recklessness of, any officer of the corporation, or any person purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and liable to be punished accordingly.
THE CODES ON TAKEOVERS AND MERGERS AND SHARE BUY-BACKS
The Code on Takeovers and Mergers (the “Takeovers Code”) and the Code on Share Buy-backs apply to takeovers, mergers and share buy-backs affecting public companies in Hong Kong and companies with a primary listing of their shares in Hong Kong.
The primary purpose of the Codes is to ensure that all shareholders affected by takeovers, mergers and share buy-backs of relevant companies are treated fairly. In order to achieve fair treatment, the Codes require equality of treatment of shareholders and disclosure of timely and adequate information to shareholders. The Takeovers Code in particular has the objective of protecting minority shareholders when control of their company changes.
XXV. THE TAKEOVERS CODE
The Takeovers Code is concerned with:
- offers for, and takeovers and mergers of, all relevant companies; and
- partial offers, offers by a parent company for shares in its subsidiary and certain other transactions where control (as defined) of a company is to be obtained or consolidated.
The provisions of the Takeovers Code are detailed, but the most significant provisions are as follows:
Mandatory Offer Requirement: Rule 26
Except where a waiver has been granted, Rule 26 of the Takeovers Code requires a mandatory offer to be made to all the shareholders of the company in the following circumstances:
- when any person (or two or more persons acting in concert) acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting shares of a company; or
- when any person (or two or more persons acting in concert) who holds between 30% and 50% of the voting shares of a company, acquires additional voting shares that increase his or their holding of voting shares by more than 2% from the lowest percentage holding by that person (or the concert group) in the previous 12 month period.
“Persons acting in concert”
A person will be taken to be acting in concert with an offeror if, pursuant to an agreement or understanding, he is actively co-operating through the acquisition of voting rights, to obtain or consolidate control of the offeree. In the absence of proof to the contrary, certain categories of persons are presumed to be acting in concert with others in the same category. The categories of persons presumed to be acting in concert include:
- a company, its parent, its subsidiaries, its fellow subsidiaries, associated companies of any of the foregoing, and companies of which such companies are associated companies; and
- a company with any directors (together with their close relatives, related trusts and companies controlled by any of the directors, their close relatives or related trusts) of it or its parent company.
Offers made under Rule 26 must be made in cash or be accompanied by a cash alternative at not less than the highest price paid by the offeror (or any person acting in concert) for shares of the offeree in the previous 6 months.
Requirements of the Takeovers Code
Rules 1 and 2 of the Takeovers Code set out the steps which should be taken by the boards of directors of the offeree and offeror companies in the course of takeover and merger transactions.
They require firstly that any offer of takeover of a listed issuer should be put in the first instance to the board of the listed issuer or its advisers before the offer is announced to the public. The identity of the offeror must also be disclosed. The board of the listed issuer must establish an independent committee of the board to make a recommendation: (i) as to whether or not the offer is fair and reasonable; and (ii) as to acceptance and voting. The board must also retain an independent financial adviser to advise the independent board committee as to those matters.
XXVI. THE CODE ON SHARE BUY-BACKS
Hong Kong has a separate Code on Share Buy-backs.
The Share Buy-backs Code distinguishes between 4 types of share buy-back:
- On Market – this is the most usual method and is normally carried out pursuant to the 10% general mandate normally granted at the AGM.
- Off-Market – Off-market share buy-backs must be approved by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (“SFC”) under Rule 2 of the Share Buy-backs Code. Approval is normally conditional on the approval of at least three-quarters of the votes cast by “disinterested shareholders”.
- Exempt – exempt share buy-backs include an employee share buy-back; a share buy-back made in accordance with the terms attached to the shares; and a share buy-back that is required by the law of the jurisdiction in which the offeror is incorporated or established.
- By General Offer – this usually takes the form of a tender offer of a certain percentage of all shareholders’ holdings. A share buy-back by General Offer requires approval by at least 50% of shareholders in general meeting. A shareholder with a material interest in the share buy-back will not be allowed to vote. If the buy-back will result in privatisation or de-listing of the issuer, the approval of 75% of shareholders is required.
1. On-market Share Buy-backs
Rule 13.07 of the GEM Listing Rules sets out the relevant requirements in relation to on-market buy-backs. An issuer whose primary listing is on the Exchange may only purchase shares on the Exchange in the following circumstances:
- the shares proposed to be repurchased are fully-paid up;
- an Explanatory Statement complying with the detailed contents requirements of GEM Rule 08 is issued to the shareholders; and
- its shareholders have given specific approval or a general mandate to make the repurchase(s) by way of an ordinary resolution passed at a general meeting of the issuer duly convened.
The Explanatory Statement must contain all information reasonably necessary to enable the shareholders to make an informed decision on whether to vote for or against the ordinary resolution to approve the share buy-back. Such information includes, in summary, the following:
- total number and description of the shares to be repurchased, and reasons for the repurchase;
- the proposed source of funds for making the proposed repurchase;
- any directors or any associates of the directors who have an intention to sell shares to the issuer, or an appropriate negative statement;
- consequences arising under the Takeovers Code of which the directors are aware, if any;
- details of any purchases by the issuer of shares made in the previous 6 months (whether on the Exchange or not);
- whether or not any connected persons of the issuer have notified the issuer that they have an intention to sell their shares to the issuer; and
- the highest and lowest prices at which the relevant shares have traded on the Exchange during each of the previous 12 months.
Dealing restrictions of on-market buy-back
On-market repurchases are subject to the following dealing restrictions:
- no shares may be repurchased if the purchase price is higher by 5% or more than the average closing market price for the 5 preceding trading days;
- shares cannot be repurchased for non-cash consideration;
- the issuer must not knowingly purchase its shares from a connected person;
- the issuer must not repurchase its shares on the Exchange at any time after inside information has come to its knowledge until the information is made public. In particular, repurchases are not allowed during the period of one month immediately preceding the earlier of: (i) the date of the board meeting to approve the annual or interim financial results; and (ii) the deadline for publishing any such results under the Listing Rules, and ending on the date of the results announcement; and
- no shares may be repurchased if that purchase will result in the number of listed shares held by the public falling below the prescribed minimum percentage.
2. Off-market share buy-backs
Off-market buy-backs must be approved by the SFC before a repurchasing company acquires any shares. Such approval will normally be conditional upon:
- approval being given by at least 75% of votes cast on a poll by disinterested shareholders in attendance in person or by proxy at a general meeting of the issuer;
- notice of the shareholders’ meeting being accompanied by a circular containing:
- details of the proposed offeree(s);
- terms and conditions of the agreement between the issuer and the proposed offeree(s); and
- advice of an independent financial adviser and the recommendation of an independent committee of the board in relation to the off-market share buy-back;
- a certified copy of the shareholders’ resolution approving the share buy-back being filed with the SFC within three days of the general meeting; and
- a copy of the agreement(s) for the off-market share buy-back being available for inspection by the shareholders.
3. Buy-back by general offer
A share buy-back by general offer must be approved by a majority of the votes cast by independent shareholders in attendance in person or by proxy at general meeting. The notice of meeting must be accompanied by the offer document.
If the share buy-back will result in delisting and privatisation of the issuer:
- the directors of the offeror and any persons acting in concert will not be considered to be independent and therefore may not vote at the general meeting; and
- the share buy-back must be approved by at least 75% of votes attaching to the shares owned by independent shareholders cast in person or by proxy and the number of votes cast against the resolution must not be more than 10% of the votes attaching to the shares owned by independent shareholders.
4. Reporting requirements for buy-backs
The issuer must submit for publication to the Exchange through HKEx-EPS a next day disclosure return no later than 30 minutes before the commencement of the morning trading session (or any earlier pre-opening session) on the business day following the buy-back showing the number of shares bought-back and the purchase price paid per share (or the lowest and highest prices paid).
Listed issuers must also include in their annual report and accounts a monthly breakdown of purchases of shares made during the financial year under review showing the number of shares purchased each month (whether on the Exchange or otherwise), the purchase price paid per share (or the lowest and highest prices paid) and the aggregate price paid. The directors’ report must refer to the purchases made during the year and the directors’ reasons for making such purchases.
5. Status of purchased shares
The listing of the bought-back shares will be automatically cancelled upon purchase and the issuer must apply for listing of any further issues of that type of shares. The issuer must ensure that the documents of title of the bought-back shares are cancelled and destroyed as soon as reasonably practicable.
6. Restriction on new issue of shares following buy-back
An issuer whose primary listing is on the Exchange cannot issue, or announce a proposed new issue of shares, in the 30 days after its buy-back of shares (whether on the Exchange or otherwise), without the Exchange’s prior approval. Exchange approval is not required for issues of securities pursuant to the exercise of warrants, share options or similar instruments which were outstanding before the share buy-back.
7. Takeovers Implications of Share Buy-backs
The takeovers implications of Share Buy-backs are set out in Rule 32 of the Takeovers Code. Under Rule 32.1 of the Takeovers Code, a share repurchase is considered to be an acquisition by shareholders whose shares are not bought-back. This is because their percentage holding of shares increases even though the actual number of shares held does not. As a result, a shareholder, or group of shareholders acting in concert, could obtain control of the issuer and become obliged to make a mandatory general offer obligation under Rule 26. The Executive will normally grant a whitewash waiver in the case of general offer obligations triggered by off-market share buy-backs or share buy-backs by general offer.
Effectively the Rule 32 whitewash mechanism applies only to a shareholder who is a director or a person who is acting in concert with a director of the company. An unconnected shareholder would not normally be regarded as having triggered a mandatory bid obligation under Rule 26 if the increase in his shareholding is solely due to share buy-backs by the company (Note 2 to Rule 32).
- Exchange’s Guide on Pre-vetting Requirements and Selection of Headline Categories for Announcements (1 April 2015)
“This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.”
Directors’ duties under Hong Kong GEM Rules
Hong Kong Companies Registry’s Guide on Directors’ Duties
Hong Kong misrepresentation
Listing Decision HKEx
Hong Kong Companies Ordinance
Part XIVA of the Securities and Futures Ordinance
Exchange Guidance Letter HKEx
Hong Kong market misconduct
Guidelines on Disclosure of Inside Information (“SFC Guidelines”)
disclosure of price sensitive information in Hong Kong